ECON Business Cycle, Inflation, and Unemployment

defined as the diffusion of fluctuations in aggregate economic activities all over the economy and not just on a single industry

Business cycle

A phase where business activities are in their temporary maximum

Peak/Prosperity

A phase in business cycle that is characterized by a decline in total output, income, trade, and employment

Recession

It is the turning point of recession or when economic activity is at its lowest. Unemployment is so severe

Trough/Depression

In this phase, there is a recovery in the economy

Expansion

Why is the performance of the Philippine economy highly correlated with the performance of other economies

Due to its openness to international trade

These theories explain the causes of business cycles within the economy

Endogenous Theories

Hypothesis in business cycle based on the explanation that aggressive investment plans result to a period of low growth and then is stimulated once foreign credit is re-established

Real structural hypothesis

Theory based on the ideas put forward by Joseph Schumpeter

Innovation theory

Defined as the enhancement of an existing production system that leads to new and better products

Innovation

Theory according to Wesley Mitchell where one phase of the business cycle grows into another

Self-generating theory

Comprises the oldest explanations of the business cycle where it is due to the deficiency in purchasing power

Underconsumption theory

Theory where the business cycle is controlled by the central bank

Monetary theory

Theories explaining the causes of business cycles as disturbances outside the economy

Exogenous theories

Definition of unemployed

Unemployed is officially defined as all those who are 15 years old as of their last birthday and during the reference period are reported as without work, currently available for work, seeking work.

It is the proportion in percent of the total number of unemployed persons to the total persons in the labor force

Unemployment

Includes all persons 15 years old and over as of their last birthday who contribute to the production of goods and services in the country whether employed or unemployed

Labor force

The percentage of the total number of persons in the labor force to the total population of 15 years old and above is called

the Labor Force Participation Rate

Labor Force Participation rate formula

Labor Force Participation Rate = Total Number of Persons in the Labor Force / Total Population 15 years old and over x 100

Temporary unemployment associated with changes in the economy, taking vacation, or temporary disturbance

Frictional unemployment

It occurs when the locations and qualifications of the labor force do not match the available jobs

Structural Unemployment

Unemployment caused by the recession phase in a business cycle

Cyclical Unemployment

When unavoidable unemployment or cyclical unemployment is zero

Full employment

The full employment rate of unemployment is referred to as

the natural rate of unemployment

Persons who are already employed but they express the desire to have additional hours of work in their present job or in an additional job, or to have a new job with longer working hours are called

Underemployed

A person is considered this if they’ve already worked 40 hours during the reference week but still want additional hours of work

Invisibly underemployed

A person is considered this if they’ve worked less than 40 hours during the reference week and wanted additional hours of work

Visibly underemployed

States that for every 2-3% movement in GDP, unemployment changes by 1% in opposite directions

Okun’s Law

Developed by Arthur Okun who developed the relationship between GDP and unemployment

Okun’s Law

Refers to the rate of increase in the average prices of goods and services typically purchased by consumers

Inflation

Mathematical expression of inflation

Inflation rate = CPI current - CPI previous / CPI previous x 100

Used as an indicator of the change in the average price of a fixed standard basket of goods and services commonly purchased by households relative to base year

Consumer price index

Is calculated as the change in the weighted overall prices of all goods and services in the CPI basket

Headline inflation

Is an alternative measure of inflation that is calculated as the rate of change in the CPI that excludes the items that have transitory effects on the CPI

Core inflation

Inflation characterized by too much spending chasing too few goods. Pressures on inflation are caused by relatively higher demand compared to the available supply

Demand Pull Inflation

Pressures on inflation resulting from shortages in supply and increases in the cost of production without a corresponding expansion in output

Supply Shocks to Inflation

Pressures on inflation resulting to higher markups by businesses

Profit-push Inflation

It is the difference between original price and the selling price

Markup

It is the sustained decrease in the average price level

Deflation

An inflation rate that is good for consumers and producers

2-3%

Refers to a period of extremely high inflation reaches 100,000% and above

Hyperinflation

When the economy is experiencing increasing inflation and unemployment at the same time

Stagflation